Obama's Business Blind Spot

In meetings last week, I was asked what the U.S. is likely to do about jobs. While the pace of hiring has slowed, the "probability of finding a job" and the Conference Board's Help Wanted Index are by a large margin at their lowest levels in 60 years. There's talk of tax credits for hiring new workers, increased public sector employment bills, hundreds of billions in new stimulus, etc.

In a quest to see what frame of reference the administration might have on this issue, I looked back at the history of the Presidential Cabinet. Starting with the creation of the Secretary of Commerce back in 1900, I compiled the prior private-sector experience of all 432 cabinet members, focusing on those positions one would expect to participate in this discussion: Secretaries of State; Commerce; Treasury; Agriculture; Interior; Labor; Transportation; Energy; and Housing & Urban Development (a).

Many of these individuals started a company or ran one, with first-hand experience in hiring and firing, domestic and international competition, red tape, recessions, wars and technological change. Their industries included agribusiness, chemicals, finance, construction, communications, energy, insurance, mining, publishing, pharmaceuticals, railroads and steel; a cross-section of the American experience. [I even gave partial credit to attorneys focused on private-sector issues, although one could argue this is a completely different kettle of fish]. One thing is clear: The current administration, compared with past Democratic and Republican ones, marks a departure from the traditional reliance on a balance of public- and private-sector experiences.

It's not a surprise that these days, private-sector engagement strikes some as pointless. The prevailing sentiment is best expressed by one of Secretary Geithner's own deputies: "Why would we consult the very executives who got us into this mess?" and Congressman Barney Frank: "The private sector got us into this mess. The government has to get us out of it." To a large extent, this cynicism is a byproduct of the colossal mismanagement of many financial and automotive firms. The following chart shows the companies that lost more than their entire 2007 book value, both in absolute terms, and as a multiple of pre-crisis book value (b). This is one of the worst legacies of the crisis: a sense that the private sector is poorly managed, greedy and completely inept (c).

However, the public sector is likely to be only a small part of the jobs solution. As shown above, post-WWII public-sector employment ranged from 15% to 19% at the peak of 1970s deficit spending, and back to 17% again. The private sector is the dominant engine of job growth and needs to be the centerpiece of a "solution," to the extent there is one. Public-sector employment has another drawback as well at a time of rising entitlements: State and local employees represent12% of the U.S. workforce, and a whopping 64% of all unfunded pension liabilities.

As for a possible "hiring tax credit," even Alan Blinder at Princeton concedes it is ripe for abuse. It invites "gaming the system" in ways too myriad to review here (firms that simultaneously hire and fire, create new firms out of old ones, etc). Entrepreneurial incentives are important to get right: New firms less than five years old account for all net job creation from 1980 to 2005 (d). A cut in payroll taxes would put in place many of the same incentives as a hiring tax credit but requires confidence in private-sector mechanics that is absent right now.

In a recent survey by the National Federation of Small Business, the primary concerns were poor sales, high taxes, government regulation and red tape (credit was only mentioned by 4% of respondents). For some companies, the prospect of cap and trade, a health care bill that does not restrain costs, unionization bills and higher corporate/personal tax rates may be too much for a hiring tax credit to overcome. As shown below, there's already a lot of stimulus in train; debates about what comes next need to be measured against the cost of paying for it. We don't have the answers. I just hope that enough voices from the private sector have a meaningful role in the debate.

Michael Cembalest is chief investment officer for JPMorgan Private Bank. The views expressed herein are Cembalest's and may not necessarily reflect the views and opinions of JPMorgan Private Bank or any of its affiliates.

Notes

(a) A variety of sources were consulted for this analysis, including the Miller Center of Public Affairs at the University of Virginia. In the rankings, I did not include prior private-sector experience for the following positions: Postmaster General; Navy; War; Health, Education & Welfare; Veterans Affairs; and Homeland Security. In the rankings, private-sector experience at a law firm counts for a 33% score, which I think is very generous. My wife strongly suggested raising this to 50%, but I refused.

(b) Computed for all companies with at least $5 billion of losses as per Bloomberg. We used 2005 book value for GM since 2007 was negative. Lehman not shown, since it stopped reporting losses after Q3 2008; subsequent losses accrued to creditors instead of shareholders.

(c) The reality is a tangled mess. The public sector lit the fuse: In 1996, HUD required Fannie Mae ( FNM - news - people ) and Freddie Mac ( FRE - news - people ) to dedicate 42% of loan guarantees to borrowers with below-median incomes (this number was raised to 52% in 2005), with subsets also required for borrowers with even lower income levels. This compressed spreads and lending standards across the industry. Butas we noted last January, Freddie Mac/Fannie Mae were only responsible for underwriting or purchasing 20% of all Alt A, Subprime, Option ARM and Home Equity loans. The private sector did the rest, willingly and with reckless abandon.